Jefferies reduces their FY21-23 earnings estimates slightly to factor in lower than expected earnings in Q2. They retain a hold rating with a target of Rs 1150. Jefferies says Titan has been improving sequentially across businesses, though YoY pressures persist, particularly in watches. Jewellery revenues in Q2 FY21 are in line with forecasts, but margins have been below, even after adjusting for one-offs. This results in a 2-6% EPS cut in FY21-23. Management is taking steps to get to growth by Q4 FY21 in jewellery and spur a marked improvement in other segments as well.

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Jewellery trends:

Walk-ins have been improving and average ticket size has risen on a YoY basis. The studded ratio, while improving QoQ, remained markedly lower than last year, at 26%, -12ppt YoY. Share of coins rose to 14% from low single digits.

Key comments:

The festive season has started on a positive note, though management will wait for the full period (31 days) as customer efforts to spread out jewellery purchases allowed for the growth in the first 10 days. Management intends to reach near pre-Covid levels by Q3 FY21 and growth by Q4 FY21 in jewellery. E-commerce is leading the recovery in watches while the trade channel remains weak due to destocking.

Other segments:

Watch revenue declined 44% YoY given the higher discretion angle, and this resulted in a small EBIT loss. While YoY performance was quite weak, there was a QoQ improvement in revenues and EBIT. Eyewear revenues also declined 39% YoY although the division generated its best profitability in a long time, at Rs 90 mn. Both segments improved to 70% levels in revenues in September.

Kotak Institutional Equities downgraded Titan to ADD from Buy rating, raising target price to Rs 1325 from Rs 1270. Q2 results of Titan were decent in context of environment, Jewellery sales tracking well (98% recovery); profitability is expected to follow while watches and eyewear segments (55% / 61% recovery) were laggards but trajectory is improving.

IIFL Securities maintains an ADD rating with a target of Rs 1,230. Titan reported jewellery margin at 7.4%, slightly below estimate, as the product mix deteriorated (studded mix down, from 38% to 26% YoY, and gold coin mix up, to 14% from 3% YoY). Retail sales were down 4%, but overall sales were boosted by Rs 3.9 bn bullion sales. Moreover, there were two one-offs: i) Rs 340 mn one-off loss of non recovery from commodity broker; ii) rental waivers.

FY22 on a low base would see a striking sales growth of 30%. Pent Up demand would surface, as would bunching up of weddings, which were postponed due to the pandemic. IIFL Securities expects jewellery EBIT margin to return to 12% in FY22 (12.3% in FY20), after a fall to 8.8% in FY21.

Sharekhan maintains Buy rating with a revised price target of Rs 1350.Titan’s standalone business recovered to 89% (consolidated recovered to 98%) with the jewellery business growing by 9% in Q2 FY2021; watches and eyewear business recovered to 56% and 61%, respectively. Consolidated OPM declined 433 bps to 6.9%, affected by hedging loss and lower operating leverage. Operating profit was down 40% to Rs. 313 cr. higher demand during the festive season and improving wedding demand will help Titan post sustained recovery in the jewellery business going ahead. Sharekhan has fine tuned our estimates for FY2021 to factor in lower-than-expected OPM. Sharekhan have maintained them for FY2022/FY2023E.

Titan Company’s consolidated revenue decreased by 2.3% to Rs. 4,553 cr as against our expectation of Rs. 4175.7 cr. Revenue of the jewellery business grew by 9%, while watches and eyewear businesses recovered to 56% and 61%, respectively, in Q2 (both the businesses recovered to 70% each in September 2020). Operating profit margin (OPM) decreased by 433 bps to 6.9% as against our expectation of 7.5%. During the quarter, the company has recognised loss of Rs 484 cr against cash flow hedging, which affected OPM substantially. During Q1 FY2021, it was Rs 205 cr. With the jewellery business expected to post sequential improvement and watches and eyewear business inching close to pre-covid levels (likely to reach 70%-75% in Q3 FY2021 and full recovery by Q4 FY2021), profitability would improve in the coming quarters. 

Further, management indicated that the hedging contract will expire by October 2020/November 2020 and will change the hedging policy, which will help in reducing the impact of ineffective hedges going forward. The cash and cash equivalent increased by Rs 382 cr to Rs 877 cr in the past six months mainly on account of stringent working capital management. Market share gains from small jewellers and higher festive/wedding demand would help the jewellery business to post good performance in the coming quarters. The watches and eyewear division has seen sequential improvement and would continue to benefit from higher sales through the online platform. Thus, strong recovery is anticipated in FY2022 with OPM coming back on track.

Key positives:

Jewellery sales grew by high single digits during 11 days of the festive season. Eyewear segment posted EBIT of Rs 9 cr at 61% of business recovery. Titan targets to open 34 Tanishq stores in FY2021.

Key negatives

Ineffective hedges resulted in a sharp decline in OPM.

Titan posted good recovery in Q2 FY2021 with 98% of the business recovering to pre-covid levels. Overall, Sharekhan expects Titan to benefit from people shifting to trusted brands and market share gains. This, along with a relatively stable balance sheet, makes it a better play in the retail space.